What is Section 270A?
Section 270A of the Income Tax Act states that an assessing officer (AO), a commissioner (appeals), a principal commissioner, or a commissioner may direct a person to pay a penalty if he under-reports or misreports his income. The penalty may range from 50% to 200%. Introduced through the Finance Act of 2017 and effective from financial years 2016-17, Section 270A deals with penalties for underreporting or misreporting income in Income Tax Returns (ITR). This section was introduced to avoid tax evasion and ensure individuals report their income accurately.
What Does Under Reporting of Income Mean Under Section 270A?
Under-reporting of income takes place when a person discloses a smaller amount than their actual income. Therefore, there can be various circumstances wherein under-reporting can occur, and we have enumerated some of them below :
- If you fail to disclose any portion of income in the books of accounts or the return of income.
- If you have filed the ITR but the income assessed by the income tax officer is more than that reported in the ITR.
- If you have not filed any return but the income computed by the income tax department is more than the basic exemption limit.
- If your income computed by the IT department is more than the income computed and declared under special tax sections 115 JB or 115JC.
Example of Under-Reporting Income
Meet Mr. Kamal, a freelance graphic designer who earns payments directly into his bank account. However, he omits reporting a portion of his income in his tax return. During an assessment, the tax officer identifies unreported income amounting to ₹1.5 lakhs.
Key Issue: Under-Reporting of Income
- Amount Under-Reported: ₹1.5 lakhs
Consequences for Mr. A:
- Higher Tax Liability: The unreported income is now taxable, significantly increasing his tax obligations.
- Penalty Imposed: A penalty of 50% of the tax due on the unreported income will be levied under Section 270A for under-reporting.
- Interest Charged: Interest under Sections 234B and 234C will be charged for delays in paying the applicable tax.
What Does Misreporting of Income Mean Under Section 270A?
As per the Income Tax Act, the term misreporting of income would include the circumstances given below -
- Misrepresentation or suppression of information
- Failure to record investments in the books
- Claim of expenditure without any evidence
- Recording of false entries in the books
- Failure to record receipt in books
- Failure to report any international transaction or deemed to be an international transaction.
Example of Misreporting Income
Meet Mr. Kamal, a salaried professional who claims a deduction for home loan interest. However, she provides incorrect details about the principal amount of her loan, resulting in a deduction higher than what she is legitimately entitled to. Upon review, the assessing officer identifies the misrepresentation and disallows the excess deduction.
Key Issue: Misreporting of Income
- Nature of Misreporting: Inflated home loan interest deduction by providing incorrect loan details.
Consequences for Ms. B:
- Increased Tax Liability: The disallowed deduction will be added back to her taxable income, raising her overall tax liability.
- Penalty for Misreporting: Penalties for misreporting income can be severe—ranging from 100% to 200% of the tax due on the misreported amount under Section 270A.
- Interest Charged: Interest under Sections 234B and 234C will be charged on the unpaid tax amount, increasing her financial burden further.
What is the Penalty Amount under Section 270A?
Misreporting:
- Penalty Rate: 200% of the tax payable on the under-reported income.
- Examples of Misreporting: False claims of deductions, inaccurate income declarations, or manipulated financial details.
Under-Reporting
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Penalty Rate: 50% of the tax payable on the under-reported income.
- Examples of Other Circumstances: Clerical errors, omissions, or unintentional mistakes in filing returns.
Important Distinction:
- The severity of penalties depends on whether the under-reporting resulted from misreporting or was due to other causes like oversight or negligence.
Proactive Action:
- To avoid penalties, taxpayers should correct errors by filing a Revised or Updated ITR under Section 139(5) or Section 139(8A).
Impact of Non-Compliance:
- Higher financial burden due to penalties, interest, and potential legal consequences under the Income Tax Act.
Calculation Under Section 270A of the Income Tax Act with Example
Example – If your income is, say, Rs. 20,00,000, and you have not reported an income of Rs 4,00,000 while filing your ITR. Then, AO can impose a penalty u/s 270A of about Rs 60,000 (50% of the tax on under-reported income, i.e., Rs 1,20,000 (400000*30%)). However, If the underreporting is due to misreporting of income, then the penalty can be up to 200% of the tax on unreported income. That means 200% of Rs. 1,20,000 (400000*30%) amounting to Rs. 2,40,000.
While filing your returns, you must disclose all your incomes under the respective heads in order to avoid penalty u/s 270A. This penalty is levied upon you for underreporting or misreporting of your income. Remember, the penalty is to be paid over and above the taxes. Therefore, file an accurate and well-timed return and become a tax-compliant citizen. Book an Online CA Now!
